Perpetual Futures Dominate Crypto Markets, Even Pricing Private Companies

The process of setting crypto prices is often misunderstood, with many believing it is determined by spot trading. However, perpetual futures, also known as perps, have become the primary driver of price discovery in the crypto market, accounting for roughly 93% of all crypto futures volume. Perps are leverage-friendly contracts that never expire and can be held indefinitely by paying a funding rate. Research has shown that perps are the strongest instruments for bitcoin price discovery, with regulated futures and spot exchanges reacting to, rather than leading, these moves. A study found that perpetual swaps on unregulated venues were the primary source of price formation, while other work identified Binance's perpetual market as the main driver of price formation. The evidence suggests that perps lead price discovery, especially during bear market price rallies. The funding rate, which is paid by the crowded side of the trade every few hours, acts as a tether to the underlying price and provides a live readout of market sentiment. Traders watch the funding rate closely, as it can indicate the direction of the market. The use of perps is not limited to crypto, as seen in the case of SpaceX, which was priced accurately by perpetual futures contracts before its IPO. The perps market was able to predict the demand for SpaceX shares, but was blind to the supply, which became a factor after the IPO. This highlights the importance of perps in price discovery and their potential to influence market prices.